On Tuesday I had a conversation with a few Senior Executives in the Department of the Interior about how to solve the Peak Oil problem–and we all came to the same conclusion: there is a structural block to the solution to this problem, because to do so would require massive and immediate investment that would not pay dividends for at least 10 years–longer than the 2, 4, and occasionally 6 or 8 year cycles in American politics that prescribe our national time-horizon. It just isn’t politically realistic to back a project that won’t pay off in time for the next relevant election cycle–even if you could find politicians that would be willing to sacrifice their own re-election for the greater good, they would still be hamstringed by the unavailability of the campaign funding on which they require, and would likely lose in the next election to a candidate who is promising a short-term benefit… We’re structurally short-sighted, which goes right along with my general thesis that the structure of our institutions, much more than the individuals within them, is the real root of our problems.
Some people believe that we can circumvent this structural problem with government by relying on the market, on private business, to make the kind of long-term investments that will save us. The problem here is that this structurally short-sighted government still sets the parameters within which private business operates, through interest rates and monetary policy. So market forces are channeled within these government parameters–which are broadly manipulated to benefit the short-term structural cycles of politics, and as a result they co-opt market forces towards their own ends.
For an outstanding example of the broad and pervasive manipulation of economic parameters by the government, take a look at this fascinating interview with economist John Williams. Williams shows how, for at least the past 25 years, the government has systematically manipulated the most fundamental of economic parameters such as the Consumer Price Index (a measure of inflation), the unemployment rate, the growth rate of Gross Domestic Product, and more. This isn’t just a case of minor fudging of the numbers–Williams provides a compelling argument, for example, that current US unemployment is currently over 12% (compared to the reported 4.6% in Jan. 2006), that the CPI is actually around 7% (compared to the reported 4% WITH energy prices included), and that the US economy actually shrank 1.9% in the last quarter (compared to the official, and already alarming “rise” of of 1.1%). Take a look at Williams “Shadow Government Statistics” site for more.
Williams does more than just compile statistics, however. His broader analysis echoes several themes from this site:
“[E]verything is fine as long as we have adequate liquidity in the equities
markets and the credit markets, but if something changes— I mean,
my goodness, suppose there’s a little bit of a political shift among the
Asian nations or that one of the OPEC members—I mean, just today
Syria has announced they are moving to using euros instead of dollars
for all foreign exchange transactions and I know that Iran has made
noises about pricing oil in euros. It does not take much to start a run. I
can’t tell you how it will start or who will start it. China has been making
noises about not getting as heavily into dollars. Of course, the U.S. puts
political pressure on all the big holders of dollars to keep doing exactly
what they have been doing, but they all know it’s a losing proposition. At
some point, the Fed is going to have to start monetizing the debt
because there are not going to be enough people to buy it. Either that,
or we are going to see a terrible spike in interest rates. The process will
eventually lead to a very high rate of inflation, high interest rates and a
very sharp decline in the dollar. If you are a central bank holding $800
billion in foreign currency reserves, that’s a lot of money.”
It increasingly seems like a financial collapse is only a matter of time. MAYBE there is a way that it could be averted, but not within the structural limitations of our system. From that standpoint, it seems obvious that we need to scrap “the system” and start over. Of course, that’s a completely unrealistic solution on a large scale–but it is certainly attainable on a localized scale. One of the tricks will be how to transition assets that are currently “within the system” to “outside the system” without a great loss in value–especially the ability to withstand symptoms of a systemic collapse such as hyperinflation, housing busts, etc. Personally, I’m not a big fan of gold, because it’s much-lauded “inherent value” is really just a function of the desire AND ability of society to possess it as a luxury item–if the financial circumstances force more of a “survival mode,” then the demand for luxury items will actually drop. It’s hard to say exactly how much of gold’s present value is its “inherent value” in a sociological sense–that is, the portion of its value that will remain–and how much of it is just a result of increased demand for luxuries. Productive land or energy commodities seem like a better bet to me… with the latter being an especially good hedge against hyperinflation, and even better than gold as a hedge if Peak Oil ends up being a cause of that hyperinflation to begin with.
